Chapter - 9 IFRS-8 Operating segments

IFRS-8 Operating segments

1. Core principle
An entity shall disclose information to enable users of its financial statements to evaluate the
nature and financial effects of the business activities in which it engages and the economic
environments in which it operates.

Operating segments

An operating segment is a component of an entity:

(a) that engages in business activities from which it may earn revenues and incur expenses
(including internal),
(b) whose operating results are regularly reviewed by the entity’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance, and
(c) for which discrete financial information is available.

An operating segment may engage in business activities for which it has yet to earn
revenues, for example, start-up operations may be operating segments before earning
revenues.

2. Reportable segments

Aggregation criteria

Operating segments often exhibit similar long-term financial performance if they have similar
economic characteristics. For example, similar long-term average gross margins for two
operating segments would be expected if their economic characteristics were similar. Two or
more operating segments may be aggregated into a single operating segment if aggregation
is consistent with the core principle of this IFRS, the segments have similar economic
characteristics, and the segments are similar in each of the following respects:

(a) the nature of the products and services;

(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance or
public utilities.

Quantitative thresholds

An entity shall report separately information about an operating segment that meets any of
the following quantitative thresholds:

(a) Its reported revenue, including both sales to external customers and intersegment sales
or transfers, is 10 per cent or more of the combined revenue, internal and external, of all
operating segments.
(b) The absolute amount of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of (i) the combined reported profit of all operating segments
that did not report a loss and (ii) the combined reported loss of all operating segments
that reported a loss.

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Chapter - 9 IFRS-8 Operating segments

(c) Its assets are 10 per cent or more of the combined assets of all operating segments.

Operating segments that do not meet any of the quantitative thresholds may be considered
reportable, and separately disclosed, if management believes that information about the
segment would be useful to users of the financial statements.

A component of entity is an
operating segment?

Yes No

2 or more component can be

aggregated?

Yes No

Meets any quantitative

threshold

Yes No

Information
is useful?

Yes
No

Already 75% of entity’s (external)

revenue is included in reportable
segments.

No Yes

Declare Reportable
segment
Do nothing

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Chapter - 9 IFRS-8 Operating segments

Information about other business activities and operating segments that are not reportable
shall be combined and disclosed in an ‘all other segments’ category separately from other
reconciling items in the reconciliations. The sources of the revenue included in the ‘all other
segments’ category shall be described.

Rules for prior periods

If management judges that an operating segment identified as a reportable segment in the

immediately preceding period is of continuing significance, information about that segment
shall continue to be reported separately in the current period even if it no longer meets the
criteria.

If an operating segment is identified as a reportable segment in the current period in

accordance with the quantitative thresholds, segment data for a prior period presented for
comparative purposes shall be restated to reflect the newly reportable segment as a
separate segment, even if that segment did not satisfy the criteria in the prior period, unless
the necessary information is not available and the cost to develop it would be excessive.

3. Disclosure
An entity shall disclose information about nature and financial effects of the business
activities and the economic environments in which it operates.

An entity shall disclose the following for each period for which a statement of comprehensive
income is presented:

Disclosure

General Segment profit or loss, Reconciliation

information assets, liabilities

3.1 General information

An entity shall disclose the following general information:

(a) factors used to identify the entity’s reportable segments, and

(b) types of products and services from which each reportable segment derives its revenues.

3.2 Information about profit or loss, assets and liabilities

An entity shall report a measure of profit or loss for each reportable segment. An entity shall
report a measure of total assets and liabilities for each reportable segment if such amounts
are regularly provided to the chief operating decision maker. An entity shall also disclose the
following about each reportable segment:

(a) revenues from external customers;

(b) revenues from transactions with other operating segments of the same entity;
(c) interest revenue;
(d) interest expense;
(e) depreciation and amortisation;

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Chapter - 9 IFRS-8 Operating segments

(f) material items of income and expense disclosed;

(g) the entity’s interest in the profit or loss of associates accounted for by the equity method;
(h) income tax expense or income; and
(i) material non-cash items other than depreciation and amortisation.

An entity shall disclose the following about each reportable segment:

(a) the amount of investment in associates and joint ventures, and

(b) the amounts of additions to non-current assets

Measurement

The amount of each segment item reported shall be the measure reported to the chief
operating decision maker for the purposes of making decisions. If amounts are allocated to
reported segment profit or loss, assets or liabilities, those amounts shall be allocated on a
reasonable basis.

If the chief operating decision maker uses only one measure of an operating segment’s profit
or loss, the segment’s assets or the segment’s liabilities in assessing segment performance
and deciding how to allocate resources, segment profit or loss, assets and liabilities shall be
reported at those measures. If the chief operating decision maker uses more than one
measure of an operating segment’s profit or loss, the segment’s assets or the segment’s
liabilities, the reported measures shall be those that management believes are determined in
accordance with the measurement principles most consistent with those used in measuring
the corresponding amounts in the entity’s financial statements.

An entity shall provide an explanation of the measurements of segment profit or loss,

segment assets and segment liabilities for each reportable segment. At a minimum, an entity
shall disclose the following:

(a) the basis of accounting for any transactions between reportable segments.
(b) the nature of any differences between the measurements of the reportable segments’
profits or losses and the entity’s profit or loss before income tax expense or income and
discontinued operations. Those differences could include accounting policies and policies for
allocation of centrally incurred costs that are necessary for an understanding of the reported
segment information.
(c) the nature of any differences between the measurements of the reportable segments’
assets and the entity’s assets. Those differences could include accounting policies and
policies for allocation of jointly used assets that are necessary for an understanding of the
reported segment information.
(d) the nature of any differences between the measurements of the reportable segments’
liabilities and the entity’s liabilities. Those differences could include accounting policies and
policies for allocation of jointly utilised liabilities that are necessary for an understanding of
thereported segment information.
(e) the nature of any changes from prior periods in the measurement methods used to
determine reported segment profit or loss and the effect, if any, of those changes on the
measure of segment profit or loss.
(f) the nature and effect of any asymmetrical allocations to reportable segments. For
example, an entity might allocate depreciation expense to a segment without allocating the
related depreciable assets to that segment.

3.3 Reconciliations

An entity shall provide reconciliations of all of the following:

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Chapter - 9 IFRS-8 Operating segments

(a) the total of the reportable segments’ revenues to the entity’s revenue.
(b) the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss
(c) the total of the reportable segments’ assets to the entity’s assets
(d) the total of the reportable segments’ liabilities to the entity’s liabilities.
(e) the total of the reportable segments’ amounts for every other material item of information
disclosed to the corresponding amount for the entity.

All material reconciling items shall be separately identified and described. For example, the
amount of each material adjustment needed to reconcile reportable segment profit or loss to
the entity’s profit or loss arising from different accounting policies shall be separately
identified and described.

3.4 Entity-wide disclosures

Additionally, following information shall also be provided if not already covered as a part of
reportable segment information, unless such information is not available and not cost
effective.

Information about products and services: An entity shall report the revenues from
external customers for each product and service, or each group of similar products and
services,

Information about geographical areas: An entity shall report the following geographical
information:

(a) revenues from external customers

(i) attributed to the entity’s country of domicile and
(ii) attributed to all foreign countries in total from which the entity derives
revenues. If revenues from external customers attributed to an individual
foreign country are material, those revenues shall be disclosed separately.

(b) non-current assets

(i) located in the entity’s country of domicile and
(ii) located in all foreign countries in total in which the entity holds assets. If
assets in an individual foreign country are material, those assets shall be
disclosed separately.

Information about major customers: reliance on its major customers, if revenues from
single external customer is 10% or more of an entity’s revenues, the entity shall disclose that
fact.

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Chapter - 9 IFRS-8 Operating segments

Comprehensive Illustration
CI-1 The following information relates to Oakwood, a quoted company with five divisions
of operation:

Wood Furniture Sports Ply Other Total

Sales Sales sales sales sales
Rs.m Rs.m Rs.m Rs.m Rs.m Rs.m
Revenue from 220 256 62 55 57 650
External customers
Inter segment 38 2 - 5 3 48
revenue
Reported profit 54 45 12 9 10 130
Total assets 4,900 4,100 200 400 600 10,200

Required:

(a) Which of the business divisions are reportable segments under IFRS 8 Operating
segments?
(b) Will be answer different from (a) if assets of Ply segment are 1,400 million.

CI-2 Zeeshan Limited (ZL), a listed company, is engaged in ‘spinning’, ‘weaving’, ‘knitting’,
‘dyeing’ and ‘home textile’ business. Result of each business segment for the year ended
June 30, 2018 are as follows:

Business Sales Gross Operating Assets Liabilities

Segments profit expenses
Rs in billion
Spinning 20 1.8 0.8 15 0.75
Weaving 5.5 0.825 0.275 4 0.25
Knitting 3 0.420 0.22 1.2 0.075
Dyeing 3.2 0.384 0.175 4.5 0.125
Home 2.5 0.2 0.1 2.5 0.15
Textile
34.2 3.629 1.570 27.2 1.35

Inter-segment sales by ‘spinning’ to ‘weaving’ and ‘knitting’ is Rs 2 billion and Rs 0.70 billion
respectively and by ‘weaving’ to ‘dyeing’ is Rs 1.5 billion. ‘Spinning’ inter-segment sales
have been sold at 9% margin and that of ‘weaving’ at 15% margin.

Operating expenses, assets and liabilities amounting to Rs 0.5 billion, Rs 0.25 billion and Rs
0.1 billion respectively, have not been allocated to any segment.

Required:

In accordance with the requirement of IFRS 8 – Operating Segments.

(i) Determine the reportable segments of ZL.
(ii) Show how these reportable segments would be disclosed in ZL’s financial statements
for the year ended June 30, 2018.

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Practice Questions
PQ-1

Norman, a public limited company, has three business segments which are currently
reported in its financial statements. Norman is an international hotel group which reports to
management on the basis of region. It does not currently report segmental information under
IFRS 8 Operating segments. The results of the regional segments for the year ended 31
May 2018 are as follows.

Revenue Segment Segment Segment

results assets liabilities
profit/(loss)
Region External Internal
Rs m Rs m Rs m Rs m Rs m
European 200 3 (10) 300 200
South East Asia 300 2 60 800 300
Other regions 500 5 105 2,000 1,400

There were no significant intra-group balances in the segment assets and liabilities. The
hotels are located in capital cities in the various regions, and the company sets individual
performance indicators for each hotel based on its city location.

Required:

Discuss the principles in IFRS 8 Operating segments for the determination of a company's
reportable operating segments and how these principles would be applied for Norman plc
using the information given above.

PQ-2

The management of a company have identified operating segments based on

geographical location. Information for these segments is provided below:

Segment Total External Internal Profit/ Assets

revenue revenue revenue (loss)
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Europe 260 140 120 98 3,400
Middle East 78 33 45 (26) 345
Asia 150 150 – 47 995
North America 330 195 135 121 3,800
Central America 85 40 45 (15) 580
South America 97 54 43 12 880
1,000 612 388 237 10,000

Required: According to IFRS 8, which segments must be reported?

PQ-3

Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints
and pharma businesses. Results of each business segment for the year ended 31 March
2015 are as follows:

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Chapter - 9 IFRS-8 Operating segments

Business Sales Gross Operating Assets Liabilities

Segment Profit expenses
Chemicals 1,790 1,101 63 637 442
Soda Ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98

Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and Rs. 10
million respectively at a contribution margin of 30%.

Operating expenses include GL’s head office expenses amounting to Rs. 75 million which
have not been allocated to any segment. Furthermore, assets and liabilities amounting to
Rs. 150 million and Rs. 27 million have not been reported in the assets and liabilities of any
segment.

Required:

(a) In accordance with the requirements of International Financial Reporting Standards:

determine the reportable segments of Gohar Limited; and (07)
(b) show how these reportable segments and the necessary reconciliation would be
disclosed in GL’s financial statements for the year ended 31 March 2015. (08) (CA Final:
Summer 15, Q-5, Marks-15)

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Chapter - 9 IFRS-8 Operating segments

Solution of Practice Questions

SOLUTION NO. PQ-1

For Norman, the thresholds are as follows:

(i) Combined revenue is Rs 1,010 million, so 10% is Rs 101 million.

(ii) Combined reported profit is Rs 165 million, so 10% is Rs 16.5 million.
(iii) Combined reported loss is Rs 10 million, so 10% is Rs 1 million.
(iv) Total assets are Rs 3,100 million, so 10% is Rs 310 million.

The South East Asia segment meets the criteria, passing all three tests. Its combined
revenue is Rs 302 million; its reported profit is Rs 60 million, and its assets are Rs 800
million.

The European segment also meets the criteria, but only marginally. Its reported revenue, at
Rs 203 million is greater than 10% of combined revenue, and only one of the tests must be
satisfied. However, its loss of Rs 10 million is less than the greater of 10% of combined profit
and 10% of combined loss, so it fails this test. It also fails the assets test, as its assets, at Rs
300 million are less than 10% of combined assets (Rs 310 million).

IFRS 8 requires further that at least 75% of total external revenue must be reported by
operating segments. Currently, only 50% is so reported. Additional operating segments (the
'other regions') must be identified until this 75% threshold is reached.

IFRS 8 may result in a change to the way Norman's operating segments are reported,
depending on how segments were previously identified.

SOLUTION NO. PQ-2

The 10% tests

Segment 10% total 10% results 10% assets Report?

revenue (W1) test (W2) (W3)
Europe Y Y Y Y
Middle East N N N N
Asia Y Y N Y
North America Y Y Y Y
Central America N N N N
South America N N N N

Based on the 10% tests, Europe, Asia and North America are reportable. However, we must
check whether they comprise at least 75% of the company's external revenue.

The 75% test

External revenue $000

Europe 140
Asia 150
North America 195
Total 485

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The external revenue of reportable segments is 79% (Rs 485,000/ Rs 612,000) of total
external revenue. The 75% test is met and no other segments need to be reported.

Conclusion The reportable segments are Europe, Asia and North America.

(W1) 10% of total sales 10% × Rs 1m = Rs 100,000. All segments whose total sales
exceed Rs 100,000 are reportable.

(W2) 10% of results 10% of profit making segments: 10% × (Rs 98,000 + Rs 47,000 + Rs
121,000 + Rs 12,000) = Rs 27,800 10% of loss making segments: 10% × (Rs 26,000 + Rs
15,000) = Rs 4,100 Therefore, all segments which make a profit or a loss of greater than Rs
27,800 are reportable.

(W3) 10% of total assets 10% × Rs 10m = Rs 1m. All segments whose assets exceed Rs
1m are reportable.

SOLUTION NO. PQ-3

Determination of reportable segments

Chemicals Soda Polyester Paint Pharma Total

Ash
-------------------------- Rs. in million --------------------------
Sales 1,790 216 227 247 252 2,732
Less: Inter-segment sales (38) - - - - (38)
Sales to external customers 1,752 216 227 247 252 2,694
Gross profit 1,101 117 48 26 31 1,323
Operating expenses (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152
Assets 637 444 115 127 132 1,455

Criteria for reporting segment Reporting External sales of

Identification segment identifying
identified segment
1. 10% of sales i.e. Rs. 273.2 million Chemicals 65.03%
2. 10% of PBT i.e. Rs. 115.2 million - -
3. 10% of assets i.e. Rs. 145.5 million Soda Ash 8.02%
73.05%

Further segment needs to be identified as reportable segment’s external sale is less than
75%

4. Highest in term of sales and % of Pharma 9.22%

assets amount remaining segments
82.27%

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Chapter - 9 IFRS-8 Operating segments

Past Papers

PP-1

Diamond Limited, a listed company, has six operating segments. These segments do not
have similar economic characteristics. Following segment wise information is available:
Revenue
Profit/(loss) Total assets
Segments External Inter-segment Total
---------------------------- ----Rs. in ‘000 --------------------- ----------
A - 24,000 24,000 (1,800) 5,400
B 184,000 8,000 192,000 (12,000) 48,000
C 22,000 4,500 26,500 19,000 4,500
D 24,000 - 24,000 (23,200) 6,000
E 23,000 - 23,000 2,300 6,500
F 25,000 3,000 28,000 2,900 18,000
278,000 39,500 317,500 (12,800) 88,400

Required:

Identify the reportable segments under IFRSs alongwith brief justification. (Aut 19, Q-2,
Marks7)

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